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As Long as We Remember...

June 13, 2011

QE-2 Runs Out of Gas…

Steven R. Berryman

No, not the ocean going cruise liner, I’m talking about the bail out of Wall Street called “Quantitative Easing Part 2,” likely about to end.


The rallying cry was that the Wall Street investment sector was too big to fail, and we should just give them money. This strategy is directly analogous to a Donald Trump casino giving free chips to all losers, and making this practice ahead of time!


We surely will elicit better behavior with that tough lesson taught!


The mechanics of QE-2 are that we borrow cash from China, subordinated by all American taxpayers, and use it to purchase the vehicle of American investment known as Treasury Bonds. The bonds are promissory notes held against the full faith and confidence in our nation paying them back at some point.


In this case, the news is that our agent – “The Fed” – is dumping the last $50 billion back to itself in this "mutually self-stimulating" transaction.


The immediate impact of this is inflationary, as if one had a Kool-Aid stand and relied on a business plan of buying up the unsold drinks with the seed money that was loaned to get the stand started into – theoretically – profitable sales.


The immediate impact of this bailout is the worsening of inflation rates via consumer prices, especially in food and fuel, exacerbated by boondoggles such as gasoline additives made unproductively from feed-corn.


Many farmers, you are Paul (as in robbing Peter to pay Paul). Inedible byproducts would be a much better fuel for the production of additive.


One of this administration’s “solutions” to this negative indicator is to remove food and fuel from the metrics of Inflation, making this disappear only on paper.


Of course, we have propped up the numerical value of our stock markets (are they still American owned?) in this process, still allowing for the paying out of large profits to Wall Street “fat cats” – many of the same people who benefited from selling mortgage-backed securities “short,” making cash on the “come line” to continue the betting analogies.


Now, put on your Mr. Wizard hat and view this diagram in your head. We are at the pool. The water is the cash, or the liquid lifeblood of our economy. The problem has been defined as “we are losing water.” This could be a leak (corruption) or evaporation (waste or entitlements, for instance) and we are here to fix it.


In our model above, we enlist a team of swimmers conveniently nearby and give them all BIG buckets. Their job is – as fast as they can – bring up water from the shallow end of the pool, run it back to the diving well, and pour it back in, thus unarguably adding-in more water.


We will ignore the part about where the water came from!


Of course, having been to a pool, we know that it all flows back together, and we have accomplished nothing but getting to watch the swimmers at their task.


Well this is the “fix” that we are employing in the course of our own national financial salvation. Wall Street is happy, Banks are happy, China is happy, and the swimmers have something to do on their break.


Of course, when we employ no-win solutions, we compound and lengthen our own problem. We have truly “robbed Peter to pay Paul,” and demonstrate daily the importance of pretending to do something.


Paul, of course will now vote for us, but he’s fickle; when the money runs out, he will become an independent again…seeking a better deal.


Fixing the pool involves bringing in new water, from a non-incestuous source, for instance, rain from the sky. Rain would be newly generated profits from a business, for instance, fairly begotten by production and sales of a better product – hopefully on a global scale – or perhaps from an intellectual breakthrough enhancing cheap energy production.


These other “feel good” solutions – foisted upon us without economic or academic bona fides – are designed to make it through another election cycle.


But, they’re beginning to truly run out of gas.


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